The focus will now be on the capital markets & the economy in longer
trm perspective...I have wanted to do this for a long while and have
wearied of outlining near term perspectives...Short term opinion has
become an overcrowded field...

About Me

Retired chief investment officer and former NYSE firm
partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader,
and CIO who has superb track
record with multi $billion
equities and fixed income
portfolios. Advanced degrees,
CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms:
CAVEAT EMPTOR IN SPADES !!!

Sunday, December 30, 2007

As 2007 closes out, my SP500 Market Tracker has continuedto weaken, putting current fair value around 1400. That reading is down from the all-time high of around 1600 setin July, 2007, with the decline reflecting a 7% cut tothe consensus 2007 earnings estimate, and a sharp contractionof the multiple to adjust for a ramp up of inflationpressure. My profits indicators outside of the financialsector actually strengthened a bit in Q4 '07, but financialsector earnings have been slashed for CDO related loan losses.Moreover, banks may warn of more losses for late 2007 afterthe books have been closed and the auditors speak up.

The weekly leading economic indicators continue to decline andare warning of a possible downturn. I am looking forward tothe ISM data on new orders for both manufacturing and servicesdue out next week to see how the monthly leading numbers shapeup. December may have been quieter for inflation, but theinflation thrust gauge remains in a strong uptrend as we passinto 2008.

The SP500 is trading at 1478, or a 5.6% premium to fair value.A stronger liquidity injection by the Fed and declining short rates have a number of investors and traders trying to discountan eventual improvement in the fundamentals later in the yearjust ahead, but the choppy price action off the 11/26/07 lowmakes clear that there are plenty of players not yet on board.

The SP500 carries an earnings yield of roughly 6% presently.That translates to a nice premium over the 91-day T-bill yield,but there is still decent quality 5% short money out there, sothe market's e/p yield, although positive, is still modest.

Dividend growth continues strong -- up 10.9% yr/yr -- and thedividend discount model I use has the SP500 fairly valued forthe long term at 1405.

There is no excess liquidity in the US financial system abovethe needs of the real economy, so the stock market will remainheavily dependent on managers' portfolio cash for support.

The continuing economic uncertainty surrounding near termoutput growth and inflation potentials could well extend throughthe first quarter of 2008, and it would not be a surprisefor the stock market to remain on edge and listless as a result.I am not uncomfortable thinking in a range of 1400 - 1550 forthe SP500, nor am I uncomfortable with the idea of elevatedvolatility.

I do think that springtime 2008 will bring an improvement inconfidence, a topic I'll discuss soon.

Wednesday, December 26, 2007

Finance sector commercial paper issuance in the US hasfallen from a historic peak of $2.2 tril. set in early Aug. 2007 to about $1.6 tril. currently, primarily reflecting thecollapse in the asset backed segment of the market. Thishas shut off the yield spread funding of longer dated CDO and other types of high risk long paper. For the pastsix months, the broad measure of credit driven funding orliquidity has grown at a 2.0% annual rate, compared to an8.6% AR over Half 1'07. Since the commercial paper market has notbottomed yet, we can look forward a little and say that the broadmeasure of liquidity ($11 tril.+) is not growing fast enough to sustain economic expansion and heavier trouble will result if liquidity growth does not improve. the matter has been made more pernicious by the fact that accelerated inflation has been gobbling up what liquidity has appeared.

Viewed yr/yr, the matter is less dire, as liquidity has risen about 6.5%. So there has been enough of a longer term tailwindto sustain the economy, but that will run down with time.

With the new TAFs added in, Fed Bank lending to the bankingsystem is around $900 bil., up roughly 6.0% yr/yr, with the vastbulk of this increase coming in recent weeks. This high poweredmonetary liquidity plus the cuts to the FFR% form the base of theFed's plan to keep the economy growing and to encourage a step-upin funding and lending by the banks. Under the best of cirumstances,this will not work overnight and it's no small wonder the Fed haspushed the prospect of faster economic growth out until the secondhalf of 2008.

Dry, arcane stuff you say? A clear 3-6 month window of uncertainty you say? Right on both counts. Will the Fed have to do more?Could well be they will. Were They too slow to act? Probably. WasTheir concern about inflation misplaced? Doesn't look so yet.

Measured yr/yr, the $ cost of production is up just about as muchas the broad measure of liquidity. This means no liquiditytailwind for the capital markets and increased reliance on portfoliocash and perhaps a new source -- the sovereign wealth fund.

On an annual basis, the US is now exporting about $120 bil. less in$ through the trade window. This means you have to keep an extracareful watch on the smaller less well developed countries thathave increased reliance on exporting to the US. Eastern Europecomes to mind.

Monday, December 24, 2007

The weekly leading economic indicators have been trendingdown since July, and have fallen enough below those peaksto move the economic expansion light from green to amber.This is a tricky situation, since we had similar moves in 1987 and 1998 without a resulting downturn. Those two periodswere ones of financial crisis, but matters did settle outfavorably for the US economy. Such could well happen this timetoo, but there has been enough damage to the readings to warrant more concern.

The inflation thrust indicator has been flat over the pastmonth, but it remains in a strong uptrend, paced by oil andbasic agriculturals. The CPI inflation of 4.3% yr/yr throughNovember wiped out the growth in the average wage, andthe increase of inflation pressure has damaged the economyas a result. Rising deliquencies on consumer credit cards islikely also a result of faster inflation. Consumers haveprobably been a little slow to re-work budget priorities withthe rises in energy and grocery bills.

The longer term economic indicators have turned from negativeto mixed. Real M-1 growth is still negative, the real wage isunder pressure and the real price of oil remains in an uptrend.Positively, the Fed is stepping up liquidity infusion, at least for the short run, and short rates are trending down. I mightadd that despite the bevy of negative headlines, the bankingsystem is functioning and growing.

Friday, December 21, 2007

As was indicated in the 12/17 post on the market, it neededto catch bids this week to put it on a recovery trajectorythat was sensible. The initial responses were very tentativeearlier in the week, but today's action was more robust andbroad. From a short run perspective, there's nothing to dobut let it go through the holidays and see if it can musterfurther upside consistency. That first run up from the 11/26low was a joke, being nearly vertical (See prior recent comments).

I plan to put some posts together in the days ahead regarding2008, toward which we are slouching along.

Monday, December 17, 2007

In the 12/6 post on the stock market, it was mentioned thatthe anticipated rally had materialized, but that the rocketlike trajectory was simply too strong. It was mentioned thata sharp sell off was in the offing, as seasoned traders werenot likely to ride the rocket much longer. And so, themarket behaved and delivered a heavy sell off. The market ismildly oversold in the very short run, and I am intrigued thatmy six week selling pressure gauge is once again in significantoversold territory. That suggests to me that there will be another try at a rally before the year is out.

At 1445, the SP500 needs to hold around this level in the daysright ahead to put it on a suitable trajectory up from theNov. 26 low. Further sharp weakness from here would suggestanother retest of lows down around 1400 -1410. That's the easycall, but we've had enough of a sell off already to bring in some buying interest now. So, I'd watch the action carefully over the next day or two to see whether the bulls are ready ornot.

Wednesday, December 12, 2007

Today the Fed and a quartet of other central banks announceda coordinated effort to accelerate the process of rebuildingcredit driven liquidity. The details have been widely reported,so no need to repeat them here. But, observations are inorder.

The $40 billion term auction facility plus the $24 billioncurrency swap arrangements adds substantially to monetaryliquidity. This is a plus for the economy down the road. It isalso mildly inflationary and brings the Fed to the brink ofabandoning a policy of bringing down the long term growth ofmonetary liquidity from the high levels of the bubble years(1992 - 2003). It is a setback for the Fed.

Creation of this facility partially separates the liqudityaspect of monetary policy from the rate setting aspect. This will complicate the process of analyzing policy.

The TAF gives the Fed substantial flexibility to manage liquidityin the system independent of month to month FOMC activity gearedto managing the FFR%.

Because the Fed can increase the $ amount of these facilities ifneeded, it is a strong prompt to the banks to resume a morenormal level of lending and to service qualified credits. TheFed is obviously unhappy with the slow pace of private sectorcredit / funding growth and wants to protect against defaltionof asset values secured by credit. Time will tell how well itworks.

A strong positive response from the banking system would allowthe Fed to roll up these faciliities easily and return to normaloperations. But, why jump ahead of the story?

The de-linking of this announcement today from the FOMC meetingrelects longstanding protocol, creates a new protocol and wasalso an expression of Fed disdain for The Street and the bankswho abandoned any semblance of credit underwriting integrityin the the CDO market. I would have enjoyed "perp walks" forbanks to the discount window instead of this more anonymousarrangement.

Tuesday, December 11, 2007

The FOMC moved to cut the FFR% and DR% by 25 bp each today. The FFR% now stands at 4.25%. That was the consensus viewamong pundits going into the meeting. The stock market threwa tantrum. Players were expecting 50 bp cuts. They had noticedthe large 150 bp spread between the 91 day Bill rate and wereencouraged by "dovish" Fedspeak from Board members in recentweeks.

I am not much of a psychoanalyzer of the Fed, so I will not tryto divine why They did exactly what They did. But, I do think itis fair to say that it is understandable that a number of playersfelt snookered.

The longstanding policy variables did suggest a cut, especiallythe weakening of the ISM manufacturing survey and a modest downturnin the capacity utilization rate. The situation was not withoutsome ambiguity, as short term business credit demand remainsrobust. Here though, the recent surge in C&I loans is likely morea reflection of interim financing for deals still stuck in thepipeline.

Besides a strong C&I book, home equity and mortgage loans are tickingup at banks, although both are well off the trends seen in recent years. The decline in the commercial paper market has slowed sharplyas well. So the system is functioning. Higher risk credits are pricedat much larger spreads over solid, investment grade credits -- as theyshould be in a sluggish economy.

The Fed has been adding monetary liquidity more generously to thesystem in recent weeks, but this may be only a seasonal developmentwhich could continue into early January, 2008.

Friday, December 07, 2007

My leading economic indicator composite continues in adowntrend. It has not fallen far enough to signal theadvent of an economic downturn, but unless the compositestabilizes soon, we'll have to entertain that idea in Q1'08. Significant declines in this indicator gave falsedownturn signals twice over the past 50 years -- 1987 and1998 -- which, interestingly, were both periods of turmoilin the financial and capital markets. So, one can stillget a recession signal and have it backfire if unsettledfinancial conditions return to stability in a timelyenough fashion. Frustrating? Well, remember Aristotle'sreminder not to demand more perfection from a subject thanit admits of.

Yr/Yr employment growth continues at a paltry 0.5% and thereal wage continues to grow below 1.0%. These conditionsreinforce a very sluggish economy.

My long lead economic indicators do not present a pretty picture either. Continued low real growth of Federal ReserveBank Credit and weak real M-1 have implied economic vulnerability the moment credit driven liquidity slackened,which it has in dramatic fashion since July. The real oilprice continues to rise, punishing broader consumption, andcapacity utilization has lost its uptrend. The bright spotis that short rates are trending lower. Moreover, the Fedhas stepped up the buying of securities, but we'll have towait a month or two to see if this is other than a temporaryseasonal push.

The SP500 market Tracker continues to slip, and is now assigningfair value for the "500" in a range of 1460 - 1500. Analystscontinue to chip away at earnings estimates, and the pace ofinflation measured yr/yr has accelerated. Thus, both earningsand the p/e are under pressure.

Thursday, December 06, 2007

The oncoming rally discussed in recent Stock market postshas turned into a rocket off the deep oversold mentioned inthe 11/18 post. At 1507, the SP500 faces trend resistance uparound 1520. The market is mildly overbought, but thetrajectory is too strong, indicating a chase to get in.Players are betting heavily on a minimum 25 bp cut to the FFR%at the 12/11 FOMC meeting and like the "freeze" on many sub-prime ARMs announced by GWB / Paulson, because it will likelystretch out the drain on lender capital over several years.

Some time over the next week or two there should be a sharpdowndraft as short term players take some chips off the tableand leave investor resolve to be tested.

Tuesday, December 04, 2007

Braille economic analysis is what I resort to when the crystalball gets too murky. It consists of moving your way into the future by grappling with the economic data and inching yourway along. Besides, no one is paying me to make forecasts now.Forty plus years of investing and trading has taught me thatyou do not have to be the first kid on the block to know what'sgoing to happen to make good money and / or dodge bullets. (Oneimportant key to success in the businesses of investing andtrading is to learn how to dodge bullets.)

I have not bought into the recession camp. It is slow out there now in the US and maybe getting slower. But I have yet to see the sort of broad imbalances between production and consumption that signal an involuntary build of inventories that leads to plantdown time and furloughs. Customarily, excess inventory is a linchpin for a down cycle. The bad news here is that inventorydata on the broad economy comes late in the reporting ofmonthly data. Two further points: Many businesses have thesupply chain management capability to control inventories ratherwell. But, employment gains and real earnings progress has beenscant this year, so it may not take gaudy inventory excess tousher in a downturn. So I inch along....

Unlike many economists, I remain concerned about inflation. AsI discussed a short time back, we did have a blowoff in the oilprice. The recent $10 bl. correction is a help, but oil remainsin an ominous uptrend that will sap most households ofpurchasing power if it persists.

THE ODD ITEM: The new US NIE asserts that Iran is aggressivelydeveloping fissionables but does not appear to have an active nuclearweapons development program underway. WHATEVER, this document doesundercut the ability of GWB and the Shooter to kite the oil pricefor the boyz in the great Southwest. Maybe less swagger from thesetwo will help settle down the oil market.